Appeal from the United States District Court for the District of Montana Donald W. Molloy, District Judge, Presiding. D.C. No. 06-CV-00047-DWM.
The opinion of the court was delivered by: O'scannlain, Circuit Judge
Argued and Submitted June 3, 2009 -- Portland, Oregon
Before: Alfred T. Goodwin, Diarmuid F. O'Scannlain, and Raymond C. Fisher, Circuit Judges.
We must decide whether a state's practice of disapproving insurance policies with clauses vesting discretion in insurers runs afoul of the Employee Retirement Income Security Act of 1974.
Montana requires its commissioner of insurance to "disap-prove any [insurance] form . . . if the form . . . contains . . . any inconsistent, ambiguous, or misleading clauses or exceptions and conditions which deceptively affect the risk purported to be assumed in the general coverage of the contract . . . ." Mont. Code Ann. § 33-1-502. John Morrison, who is commissioner by virtue of being state auditor, has announced that this statute requires him to disapprove any insurance contract containing a so-called "discretionary clause." He has consistently disapproved such policy forms. We will call this his "practice," as there is no specific Montana law forbidding discretionary clauses.
Under the Employee Retirement Income Security Act of 1974 ("ERISA"), insureds who believe they have been wrongfully denied benefits may sue in federal court. The court determines the standard of review by checking for the presence of a discretionary clause. Such a clause might read: "Insurer has full discretion and authority to determine the benefits and amounts payable [as well as] to construe and interpret all terms and provisions of the plan." If an insurance contract has a discretionary clause, the decisions of the insurance company are reviewed under an abuse of discretion standard. Absent a discretionary clause, review is de novo. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 111 (1989).
Discretionary clauses are controversial. The National Association of Insurance Commissioners ("NAIC") opposes their use, arguing that a ban on such clauses would mitigate the conflict of interest present when the claims adjudicator also pays the benefit. The use of discretionary clauses, according to NAIC, may result in insurers engaging in inappropriate claim practices and relying on the discretionary clause as a shield. See also John H. Langbein, Trust Law as Regulatory Law: The Unum/Provident Scandal and Judicial Review of Benefit Denials under ERISA, 101 Nw. U. L. Rev. 1315, 1316 (2007) ("As regards Unum's ERISA-governed policies, Unum's program of bad faith benefit denials was all but invited by an ill-considered passage in . . . Firestone Tire . . . which allows ERISA plan sponsors to impose self-serving terms that severely restrict the ability of a reviewing court to correct a wrongful benefit denial."). According to NAIC, as of 2008, a dozen states had limited or barred the use of discretionary clauses in at least some form of insurance.
Insurers and other supporters of discretionary clauses argue they keep insurance costs manageable. They assert that more cases will be filed in the absence of a discretionary clause and that the wide ranging nature of de novo review will lead to increased per-case costs as well. Failure to control litigation costs, they suggest, will discourage employers from offering employee benefit programs in the first place. See, e.g., Metro. Life Ins. Co. v. Glenn, 128 S.Ct. 2343, 2353 (2008) (Roberts, C.J., concurring in part and concurring in the judgment) ("Ensuring that reviewing courts respect the discretionary authority conferred on ERISA fiduciaries encourages employers to provide medical and retirement benefits to their employees through ERISA-governed plans-something they are not required to do.").
Standard Insurance Company ("Standard") duly applied to Morrison for approval of its proposed disability insurance forms which contained discretionary clauses; Morrison denied the request. Standard responded by suing in district court, arguing that the subject is preempted by ERISA. The district court granted the Commissioner summary judgment, and Standard timely appeals.
 With certain exceptions, ERISA preempts "any and all State laws insofar as they may now or hereafter relate to any [covered] employee benefit plan." 29 U.S.C. § 1144(a). Relevant here, the so-called savings clause saves from preemption "any law of any State which regulates insurance, banking, or securities." Id. § 1144(b)(2)(A). Thus, while ERISA has broad preemptive force, its "saving clause then reclaims a substantial amount of ground." Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 364 (2002). As the Supreme Court has stated, the tension between the broad preemption and the savings clause is marked:
The unhelpful drafting of these antiphonal clauses occupies a substantial share of this Court's time. In trying to extrapolate congressional intent in a case like this, when congressional language seems simultaneously to preempt everything and hardly anything, we have no choice but to temper the assumption that the ordinary meaning . . . accurately expresses the legislative purpose with the qualification that the historic police powers of the States were not [meant] to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress.
Id. at 364-65 (internal quotation marks and citations omitted).
Federal courts have interpreted ERISA as directing them to make substantive law as well. See Firestone Tire, 489 U.S. at 110 ("[C]courts are to develop a federal common law of rights and obligations under ERISA-regulated plans." (internal quotation marks omitted)). In doing so, "we are guided by principles of trust law." Id. at 111.
 Is Commissioner Morrison's practice of denying approval to insurance forms with discretionary clauses pre- empted by ERISA? Here, no one disputes that Commissioner Morrison's practice "relate[s] to any [covered] employee benefit plan." 29 U.S.C. § 1144(a). It is thus preempted unless preserved by the savings clause. To fall under the savings clause, a regulation must satisfy a two-part test laid out in Kentucky Ass'n of Health Plans, Inc. v. Miller, 538 U.S. 329, 342 (2003). "First, the state law must be specifically directed toward entities engaged in ...